J. Crew to Open Chain for Budget-Conscious Shoppers

J. Crew is developing a new format aimed at budget-conscious shoppers, people familiar with the situation said, underscoring the difficulty apparel retailers have had in boosting sales without help from discounts.

The new format is called J. Crew Mercantile, the people said. It will feature merchandise and prices closer to what shoppers would find at J. Crew Factory, the retailer's outlet stores, than what is available in its full-line stores, one of the people said.

A spokeswoman confirmed that the retailer owned the J. Crew Mercantile name.

The move comes after J. Crew turned around its operations by focusing on new styles like men's suits and adding more upscale designs with prices to match. But a lackluster holiday season for retailers that persisted into the first few months of this year has re-emphasized that chains need to offer bargains to lure in shoppers who have retained a frugal streak.

Even J. Crew, which had been known for holding sales infrequently, has been forced to play the game. One recent offer: A $25 coupon to spend in its stores with no strings attached.

J. Crew Mercantile, a name the company trademarked in November, would help the company broaden its reach to discount-seeking shoppers while in theory not hurting the pricing power of its mainline brand.

The new chain would also offer another avenue for growth as Leonard Green & Partners and TPG, the private-equity firms that own J. Crew, prepare it for a potential initial public offering or sale. In January, J. Crew asked Goldman Sachs Group to begin work on a potential IPO, people familiar with the situation said.

Millard Drexler, J. Crew's chief executive, made a similar move in the 1990s when he was CEO of Gap Inc. While there, he developed Old Navy, which sells lower priced versions of the T-shirts, jeans and shorts for which Gap has become known

J. Crew currently caters to price conscious shoppers with J. Crew Factory, its outlet store. But Factory stores tend to be located in outlet malls far away from where most people actually live in an attempt by retailers to avoid cannibalizing full-priced sales. Without the "outlet" association, J. Crew Mercantile could open in regional malls closer to urban centers.

The retailer has been scouting locations for the new chain, two of the people said. A few leases have been signed, but no stores have been opened, one of those people said.

J. Crew Mercantile would be the retailer's latest effort to reach different segments of the population. Since becoming CEO in 2003, Mr. Drexler has launched Madewell, a chain that sells more casual clothes aimed at slightly younger customers, and has opened a handful of stand-alone men's stores.

Old Navy eventually overtook Gap in both revenue and number of stores in the U.S.

Other efforts to segment the market haven't worked as well. Teen retailers Abercrombie & Fitch Co. and American Eagle Outfitters Inc. tried to attract older customers with Ruel and Martin + Osa respectively, but both concepts were later closed. Likewise, Abercrombie is closing its Gilly Hicks stores, which sold bras and underwear, and Aéropostale said on Wednesday that it would close 125 of its P.S. stores aimed at children in an attempt to make the chain more profitable.

The mistakes can be expensive, costing tens of millions of dollars to exit leases. Even when they succeed, the new formats can take sales away from the main brand.

At a time when much of retail has become a zero-sum game amid sluggish growth in sales, that may be the lesser evil, however.

"Retailers would rather cannibalize themselves than have someone else do it," said Liz Dunn, an analyst with Macquarie Securities.